“Today I ask myself, where would I rather have my subscribers be – loaded up in the Dow Jones Industrial Average or loaded up with gold?. And in all honesty, I believe they are better off in gold than in the stock market with DIA.

“There are a number of items favoring higher gold now.

(1) Interest rates are at zero, which means the ‘opportunity cost’ of owning gold now is highly favorable. You sacrifice no yield in owning gold vs. Treasury bills. T-bills pay you nothing, so you might as well have your money in gold.

(2) The Bernanke Fed will evidently stop at nothing in its all-out attempt to ‘jump start’ the wobbly US economy. This means spending and building debt at a never-seen-before rate. This will result in inflation. The Fed can create fiat money – any quantity at will, but it cannot direct where that money will go. So far, the money is not going into the economy, banks remain reluctant to lend and consumers are reluctant to spend. The newly-created money has been going into bank reserves and into the stock market. Stocks have been rising on an ocean of liquidity. The sinking dollar has been a huge help to the big Dow-type stocks which benefit from their ability to export. This is resulting in world-wide central bank inflation as the banks seek to devalue their money in an effort to keep the dollar strong.

(3) The world’s central banks are now seeking to protect themselves from a falling dollar by buying gold. After years of selling gold, ironically, the central banks are now buying gold. In today’s Wall Street Journal we see the headline, ‘Central Banks Join A New Gold Rush’. This is indeed ironic. In swapping their own paper for gold, many central banks are admitting that gold is superior to the very paper they are creating out of thin air.

(4) Many nations are now seeking to boost the ratio of gold to paper in their reserves. The US has the largest ratio of gold to junk fiat paper, 77.4%. But the US stupidly only places the value of our gold at $42.22 an ounce. If the US marked our gold to market, it would be a tremendous help to our government’s balance sheet. But the US prefers to live in a fantasy world where gold is worth less than $50 an ounce!

Germany has 69.2% of its reserves in gold.
Italy has 66.6%.
France has 70.6%.
UK has 17.6% (after idiotically selling most of its gold near the low below $300 an ounce).

Japan has 2.3% of its reserves in gold.
India has 4.0%.
Russia has 4.3%.
China has 1.9%.

It’s easy to see that Russia, India and China are low on gold. All three would like to at least double the percentage of gold in their reserves. The race is on for these central banks to accumulate gold without running the price of gold sky-high.

(5) In the US, literally no one owns gold. Rather, US citizens are selling their gold (jewelry) to companies who are advertising that they’ll buy ‘your overpriced’ gold for cash.

(6) A few nations are actively promoting the ownership of gold. China, the world’s biggest miner of gold, has been encouraging its people to buy gold. In London, Harrod’s department store is now selling gold coins and bars to anyone who has the paper to buy gold. Within a year or so, I expect public buying of gold to reach a crescendo. Interestingly, most Americans have never seen a gold coin.”

Although gold certainly looks bullish on a medium- to longer-term horizon, one must be cognizant of the precious metal perhaps having risen too much too soon for the moment. David Fuller (Fullermoney) said: “On a very short-term technical basis, gold is temporarily overbought following its steady march higher ever since the market was surprised by India’s purchase. Today’s small key day reversal suggests that a pause and consolidation may now occur, possibly similar to the small reactions and trading ranges seen in September and October. However, we may also see a briefer and shallower consolidation, as is often the case when a trend becomes more widely recognised and therefore attracts participation.”

3 comments to Richard Russell: Six reasons to invest in gold

What about investors that do not invest in USD? The increase in the gold price is continually offset by the weakness of USD. For a ZAR investor, as an example, while the gold price in USD has been increasing the gold price in ZAR has been going sideways.

Richard Russell presents 6 reasons why investing in gold is better than stocks. However I have some objections.

There could be no gold left in the US Treasury. Not even a single independent inventory check is allowed. I actually believe the nominal value has been marked up from $35 (which was the original price set after Bretton Woods) to market price now (circa $1000). See US Treasury Gold Account below. But to avoid a Black Swan event the investor needs to know the answer to some real questions. The real questions are whether that inventory is fake and whether the US actually owns whatever gold is there.

Especially today when it is on all foreigners’ lips whether or not they can risk continuing to buy US government debt in the form of US Treasury bonds, it is manifestly obvious that if the US Treasury did still own all the stated quantities of gold even after all the sell-offs by President Carter and later governments, it would be to its great advantage to publicize the result of three independent checks of the quantity and quality of the gold in its vaults. The US Treasury claims it has $11 tr gold (see below again).

However, if this claim were true then there would have been no need for TARP, or any of the other hand-wringing expenditures squeezed out of the Chinese, Japanese and Arabian purchasers of US Treasuries. Due to successive US governments selling off US gold, inter alia, other estimates put the US gold reserves at a mere $100 bn, i.e. at roughly 9% of the official 2009 value, while others have varying estimates, of which $137 bn is only one. The official version claims $11tr, but where is the corroboration?

It is also patently obvious that if the US actually had this $11tr of gold, the dollar would not have weakened at all. Contrary to Richard Russell’s account, the US does not back its currency by 77.4%. 77.4% may be the percentage of its gold to other reserve currencies, which is not the same as the percentage backing of its own currency. For 77.4% would be an incredible strength of backing for a fiat currency in today’s world. The same goes for Germany’s ratio of gold to the other foreign reserves it holds. As far as I am aware no country presently has gold to more than 10% of the value of its own currency volume.

Even India’s recent purchase of $200 billion gold from the IMF only brings the gold backing of India’s foreign exchange reserves to 6%. China has only 2% of its foreign exchange reserves in gold, let alone 2% of its entire currency volume. If the US had a vast gold backing of its dollars to the value of 77.4% of its dollar volume there would hardly have been an appreciable fall in the dollar, and it is hard to see that there would have even been any major collapses in the US financial sector as we have seen and are still seeing.

Therefore, the two vexing issues today with respect to the US gold holdings are whether the US actually holds the gold it says it does and whether it has swapped that gold to buy back dollars, or other foreign reserves.

Notice no definitive independent valuation by certified valuers is allowed. Yet we have all seen what happens when organisations rate themselves. We also saw the consequences of rating agencies rating assets for the sellers and not the buyers. That we are now in the age of complete transparency in valuation evidently has not dawned upon the US Treasury. We also know that many other things did not dawn upon it during the last 24 months, until too late. Its track record is not scintillating. Furthermore, and worryingly, when the markets collapse it will be too late for any rushed last-minute independent valuations of the gold stock and bona fide independent certification of ownership. Especially the latter takes time.

What I would like to know is a well-reasoned estimation of what the US dollar will be worth today if the world finds out that the US no longer actually owns any gold in its vaults. This is my first question.

Then I have two further questions. Of course there will be other far bigger scams that will crack open in time, just as the Madoff scam was the first very small precursor.

During the Second World War the Swedish banker Wallenberg gave good gold to Hitler in exchange for gold polluted with mercury (taken from the teeth of the six million Jews shot or gassed to death). Hitler needed the bona fide gold so that he could trade the bars to finance his wars. The polluted gold would not do.

Recently some ETF gold and silver bars have been discovered to be false – in fact nothing else but tungsten coated with gold, something which is very difficult to detect unless one actually melts it or has very expensive equipment.

As we all know, gold has a small use in electronics as the best conductor of electricity, and of course as jewellery. Its only other major use is its usefulness as a relatively indestructible and immutable alternative store of value, particularly in competition with fiat currencies. The greater value of gold is therefore in its use as a store of value. However, if new risky characteristics of market gold become associated with doubt in the minds of the public, the value of gold will plummet, since “Bad money drives out good under legal tender laws” (Gresham’s law). Since ownership and exchange of gold is legal in most countries, it is de facto legal tender, whether or not it is officially proclaimed as such.

My second question is therefore: what will happen to the non-gold stock market when the ETF market and bullion market for gold and/or silver collapses?

My third question is: what will the value of the dollar later be when the US government confiscates the gold held by individual citizens, as President Franklin D Roosevelt did in 1933?

Until my questions are satisfactorily answered I believe that investing in gold and silver does carry considerable risk, perhaps of the hidden ‘black swan’ variety. I look forward to an article by experts on these questions.

It is also patently obvious that if the US actually had this $11tr of gold, the dollar would not have weakened at all. Contrary to Richard Russell’s account, the US does not back its currency by 77.4%. 77.4% may be the percentage of its gold to other reserve currencies, which is not the same as the percentage backing of its own currency. For 77.4% would be an incredible strength of backing for a fiat currency in today’s world. The same goes for Germany’s ratio of gold to the other foreign reserves it holds. As far as I am aware no country presently has gold to more than 10% of the value of its own currency volume